Survivor benefits for the spouse of a plan participant

A survivor annuity, either in the form of a qualified joint and survivor annuity, or QJSA, if the participant is alive on the starting date, or a qualified pre-retirement survivor annuity, or QPSA, if the participant dies before the starting date, must be provided to married plan participants and their spouses with respect to certain qualified plans.

These requirements apply to participants in defined-benefit (pension) plans, and defined-contribution plans subject to the minimum funding requirements of Internal Revenue Code ß 412 (e.g., money purchase plans including target benefit plans). Participants in other defined-contribution plans, such as profit-sharing plans, are not subject to the QJSA and QPSA requirements if all of the following requirements are met:

1. The plan provides that the participant's nonforfeitable accrued benefit (less any security interest held by the plan pertaining to a loan outstanding to the participant) is payable in full on the death of the participant to the participant's spouse, or to another designated beneficiary if there is no surviving spouse or the surviving spouse consents.

2. The participant does not elect a payment in the form of a life annuity.

3. The plan does not contain assets transferred from a defined-benefit plan or another plan subject to the QJSA and QPSA requirements. However, if the plan separately accounts for the transferred assets, the participant will be subject to the QJSA and QPSA requirements only with respect to the transferred assets, and not for all the assets in the plan.

A qualified joint and survivor annuity means an annuity for the life of the participant, with a survivor annuity for the life of the participant's spouse that is not less than 50 percent and not more than 100 percent of the amount of the annuity payable during the joint lives of both parties, and that is the actuarial equivalent of an annuity for the life of the participant.

Observation: Providing an annuity for the participant's spouse means that the annuity the participant will get during his life will be less than the annuity that he would have received if the annuity were payable for his life only. How much it will be reduced depends on the percentage that the spouse's annuity will be of the participant's annuity during their joint lives, and the age of the spouse. The higher that the percentage of the participant's spouse's annuity is of the annuity payable during their joint lives, the lower the amount of the annuity payable during their joint lives will be. Also, the younger the participant's spouse is, the lower the amount of the annuity payable during their joint lives will be, since, based on the survivor's life expectancy, the survivor's annuity can be expected to be paid over a longer period of time.

Providing a survivor's annuity equal to 100 percent of the annuity payable for the joint lives of the participant and his spouse does not mean that a spouse who survives the participant would get a survivor's annuity twice as big as it would be if it were only 50 percent of the annuity payable for the joint lives, since the annuity payable during their joint lives will be less if a 100 percent survivor's annuity is chosen.

Example 1: Your client plans to retire when he reaches age 65. Her husband will be 60 at that time. She will receive a pension from her company when she retires. If she receives a pension for her life only, she will receive $6,500 a month. If she receives a pension for her life with a 50 percent survivor benefit for her husband, she will receive $6,000 a month, and her husband will receive $3,000 a month if he survives her.

If she receives a pension for her life with a 100 percent survivor benefit for her husband, she will receive $5,300 a month, and he will receive the same amount if he survives her.

For a participant who dies on or before the earliest retirement date, a QPSA in a defined-benefit plan is a survivor annuity for the life of the participant's surviving spouse, the amount of which is not less than the benefit that would have been payable to the participant under a QJSA (or its actuarial equivalent) if the participant:

* Had separated from service on the date of death;

* Survived until the earliest retirement age;

* Retired at the earliest retirement age with an immediate qualified joint and survivor annuity; and,

* Died on the day after the day on which the participant would have attained the earliest retirement age.

For a participant who dies after attaining the plan's earliest retirement age, but before actual retirement, a QPSA in a defined-benefit plan is a survivor annuity for the life of the surviving spouse, the amount of which is no less than the amount of benefit that would have been payable as a survivor annuity under a qualified joint and survivor annuity (or its actuarial equivalent) if the participant retired with an immediate qualified joint and survivor annuity the day before his death.

A defined-contribution plan that is subject to the qualified survivor annuity requirements must provide a QPSA with a value that is not less than 50 percent of the nonforfeitable account balance of the participant as of the date of his death.

Waiving requirements

The participant may elect to waive the QJSA and/or the QPSA requirements, but only if her spouse consents to the waiver. Spousal consent is also required to a plan's making a loan secured by a participant's accrued benefit. Waiving the QJSA and/or the QPSA requirements will increase the amount of the annuity payable to the participant, since it will then be payable to him only for his life.

Spouse benefits

If a defined-contribution plan is not subject to the QJSA and QPSA requirements, the requirement that the spouse must be the sole beneficiary of the participant's nonforfeitable accrued benefit on the participant's death also can be waived only with the spouse's consent. However, unlike plans subject to the QJSA and QPSA requirements, the participant can have the entire balance in such a defined-contribution plan distributed to him during his lifetime without the spouse's consent.

Observation: This means that the participant could avoid the spouse's survivorship rights in a plan not subject to the QJSA or QPSA requirements by having the balance in the plan distributed to him, and then rolling it over to a traditional IRA, since there is no requirement for a traditional IRA to provide a spousal benefit. However, state laws, which often provide the surviving spouse with a right to share in the deceased spouse's estate, even if the deceased did not provide for the survivor, may allow the survivor to claim all or part of the amount remaining in the traditional IRA at the time of the owner's death.

To waive or not?

Take the following factors into account in determining the amount of the annuity to be provided the surviving spouse or whether to have the right to a survivor's annuity waived:

* The comparative health of the participant and his spouse. For example, if the spouse is terminally ill at the time that the participant is retiring, and the participant is in good health at that time, waive the spouse's right to a survivor's annuity so as to increase the amount of the participant's annuity. On the other hand, if the participant is the one who is seriously ill, provide for the spouse to get the highest survivor's annuity available under the plan (which, as noted above, can't be more than 100 percent of the annuity that would be payable to the participant during their joint lives).

* The spouse's own assets and other assets she would receive from the participant if the participant died first. For example, if the spouse would also be getting a pension that is about equal to the participant's pension, then it might make sense for both of them to waive their rights to a survivor's annuity from the other's pension (assuming that they were both in comparatively good health), so as to maximize the pension each would receive during his or her own life.

Also, if the pension represents only a comparatively small part of their joint income after retirement, and most of the remaining income will be available to the survivor if the participant dies first, consider giving the surviving spouse the minimum survivor's annuity allowable (50 percent of the annuity payable during their joint lives), or even waiving the right to the survivor annuity completely, so as to maximize the amount available during their joint lives when their expenses will probably be higher.

* Whether expenses will be reduced if the participant dies first. Two cannot live as cheaply as one, but one cannot usually live for half the cost of two. For example, if a large part of a couple's expenses go for housing (rent or mortgages, real estate taxes, etc.), then those expenses won't go down much after the participant's death (unless the survivor moves to a less expensive residence). Where expenses won't be substantially less after the participant's death, it would usually be inadvisable to waive the survivor annuity entirely.

On the other hand, if expenses will be substantially reduced, e.g., because housing costs are a small part of total expenses and the surviving spouse will incur substantially lower travel and entertainment expenses after the participant dies, then it probably is advisable to give the survivor the minimum survivor's annuity possible, or even waive the survivor's annuity entirely.

* Inflation as a factor. While some government pensions are increased annually to reflect increases in the cost of living, most pensions are not. Thus, the value of the pension based on what it is able to buy is likely to go down over time. If it seems likely that the surviving spouse will outlive the participant by a substantial period, consider providing her with the maximum survivor's pension possible, so that she will be better able to cope with inflation after the participant dies.

On the other hand, if the participant is likely to outlive the surviving spouse, give the surviving spouse the minimum allowable survivor's pension or waive the right to a survivor's pension entirely.

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